The Gazette

Business owners: planning for a secure retirement and your family's future

Nathan Long, senior pensions analyst, provides an overview of the options for saving
while working (and why pensions remain a hugely valuable option).

Given the commitment, dedication and single-mindedness needed to run a business, it
would be easy to forgive business owners for neglecting their personal finances.

Regardless of the riches awaiting those who sell a highly successful business in the
years to come, it remains crucial to squirrel away sufficient monies for life after
work.

Generally, most people require somewhere between half and two-thirds of their income
from work when they decide to retire, which means saving significant sums over the
course of a working life.

How do pensions changes affect my options?

The tax efficiency of employer contributions has historically promoted pensions to
be the principal home for the retirement savings of business owners. However, a raft
of recent changes has made revisiting personal finances imperative.

April 2016 brought a change to the taxation of dividends, as well as a drop in the
amount that can be paid into pensions, both over a lifetime and annually.

These changes follow hot on the heels of a pension overhaul, where members were handed
full flexibility to draw as much or as little from their retirement savings as they
want, when they want, providing they are over the minimum pension age (currently 55).

These are hugely popular amendments, not least because they allow people to easily
pass their pension on to their family on death. This inheritability is sure to be
a huge attraction to business owners. Large sums have been shovelled into pensions
since these changes were introduced.

But what of these other changes? A tweak to dividend taxation means that the first
£5,000 of dividend income is now tax free, with the remainder taxed at 7.5%, 32.5%
or 38.1%, depending on whether the recipient is a basic, higher or additional rate
payer. Assessing how best to personally extract profits from a company through a combination
of dividend, salary and pension remains a task for the accountant, as you might expect.

Regardless of the exact split between salary and dividend, employer pension contributions
look set to retain their advantage. They remain free from income tax and (crucially)
free from national insurance, just like dividends, as well as being free from corporation
tax, like salary.

In fact, pensions are so attractive that the government has sought to limit the amount
the highest earners can save. The lifetime allowance (a cap on your total lifetime
pension value) has been slashed by £250,000 to £1 million. Transitional protection
might be available, so anyone who thinks they may be affected should speak to a financial
adviser.

In addition, the maximum annual pension contribution for those with income over £150,000
has fallen. The £40,000 standard annual limit is whittled down by £1 for every £2
of income above £150,000. This limit can drop to as low as £10,000 for those with
income over £210,000. This new rule includes employer pension contributions as well
as income from dividends, interest and rental property, so it is worth being extra
careful.

To bring this to life, someone with income of £200,000 per annum would actually have
a reduced annual allowance of £15,000. If this person targets a £100,000 income in
retirement – half of that earned while working – they would require a capital sum
of around £2.5 million, assuming they draw at a rate of 4%. This rate is deemed broadly
sustainable to avoid running out of money in retirement.

ISAs: cash and stocks and shares

Clearly, high earners who are constrained by these limits cannot use a pension for
all their retirement savings, and should look to ISAs to shelter further monies from
the tax man.

Principally, ISAs take two forms: cash and stocks and shares. Holding cash is a good
home for any monies needed for a rainy day, whereas investing in the stock market
is generally more suitable for long-term retirement savings. Stocks and shares ISAs
provide a tax shelter for investments and act as valuable supplement to pension savings.
ISAs have an annual contribution limit of £15,240 for the current tax year, which
can be split, as required, between the different types.

It’s not all doom and gloom for higher earners. The chancellor is also increasing
the amount that can be paid into ISAs each year to £20,000 for next year, and is finalising
the rules for a new lifetime ISA (LISA).The LISA looks poised to provide a 25% government
uplift in subscriptions for the under 40s, provided they access the monies after the age
of 55 – the equivalent of a £1,000 bonus on a £4,000 subscription.

There remains a squeeze on higher earners with seemingly little political incentive
for this to change, despite the chancellor’s ISA tinkering. Whether business owners
are focused on saving for retirement, or extracting company profits tax efficiently,
pensions remain a hugely valuable option. Self-invested pension plans (SIPPs) provide
a wide range of investment options and, when teamed with the new flexible pension
options at retirement, allow people to have control over their own future.

About the author

Nathan Long is a senior pensions analyst at Hargreaves Lansdown, a leading provider of investment management and pension products and services to
private investors and employers in the UK.

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